A reverse mortgage is a mortgage in which a homeowner, usually an elderly or retired person, borrows money in the form of annual payments charged against the equity of th
The Home Equity Conversion Mortgage (HECM), also known at a reverse mortgage, was designed by Congress and the U. S. Department of Urban Development (HUD) specifically to help seniors enhance their retirement years. It is a safe, secure government program, not a swindle that takes advantage of unsophisticated seniors. In fact, numerous safeguards in today's reverse mortgage programs protect senior homeowners from fraud. HECMs are very safe for people who need them.
A reverse mortgage is a loan that enables senior homeowners 62 or older to borrow against the equity in their home, without having to sell the home, give up title, or take on a new monthly mortgage payment. The money received can be used for any purpose. The loan amount depends on the borrower's age, current interest rates, and the value of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower's estate
The most popular reverse mortgage program is the Home Equity Conversion Mortgage, or HECM, administered through the U.S. Department of Housing and Urban Development (HUD). You can read the full details of the program here.
Key Features and Safeguards
==> Third Party Independent Counseling: Borrowers must meet with an independent reverse mortgage counselor, either in person or by telephone, who will review the transaction and answer any questions the borrower may have.
==> No Maturity Date: A reverse mortgage cannot become due during the homeowner's lifetime. It is a permanent program. The fact that there are no required payments and there is a lifetime right to occupy the home provides great protection against unexpected future circumstances, making reverse mortgages much safer than other loan alternatives.
==> Limitation on Fees Charged: Fees are limited by HUD regulations and may be financed, enabling a borrower to incur very little out-of-pocket expense to get a reverse mortgage.
==> Advance Disclosure of Costs: The Total Annual Loan Cost disclosure displays the total transaction costs over the projected life of the loan. This way, a borrower is made fully aware of the costs incurred in obtaining the reverse mortgage.
==> Standard & Capped Interest Rates: The interest rate is the same no matter which lender a borrower chooses. Interest rates are adjusted either monthly or annually (the borrower chooses) and have lifetime caps.
==> No Prepayment Penalty: Although the loan is not due and payable until the borrower permanently moves out of the home, it can be paid-off at any point prior with no additional fees or costs.
==> Three Day Rescission Right: Even after the loan closes, a senior has up to three days to cancel the transaction for any reason whatsoever.
==> Asset Protection: The amount due can never exceed the value of the home and title to the home always remains with the borrower. When the loan becomes due, the lender is repaid the sum of funds borrowed plus the accrued interest, but never more than the value of the house. Any remaining value belongs to the homeowner or the estate.
"HECM can be used by homeowners who are 62 years of age and older. The total income that an owner can receive through HECM is the maximum claim amount, which is calculated with a formula including the age of the owner(s), the interest rate, and the value of the home. For example, on the basis of a loan at recent interest rates, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent, and an 85-year-old could borrow up to 56 percent."
For example, a typical San Francisco Bay Area home is $700,000. A 75-year-old homeowner who owns the house outright can borrow 33% or $228,000. Alternatively, at the going rate of 5.87%, the senior could receive $1,526 a month for the rest of their life as long as they lived in the home.
David Chee will monitor the discussion forum for this article and can give answers for specific cases if you want to see how much you or someone you knows can get from a reverse mortgage. All he needs is the Zip Code of the property, how much it is worth, the age of the borrower(s) on title, and the outstanding balance of the existing mortgage and liens, if any.
Note: David Chee, Certified Public Accountant and Reverse Mortgage Specialist, contributed to this article.
DISCLAIMER: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.
The copyright of the article Reverse Mortgages in Investment is owned by Kirk Lindstrom. Permission to republish Reverse Mortgages in print or online must be granted by the author in writing.
Thanks for the introduction Kirk. I look forward to
participating here.
More Reading
<a
href="http://www.amazon.com/exec/obidos/redirect?link_code=ur2&tag
=kirklindstrom&camp=1789&creative=9325&path=http%3A%2F%2Fwww.am
azon.com%2Fgp%2Fproduct%2F0764584464%2Fsr%3D8-1%2Fqid%3D1141568922%2Fref%3D
pd_bbs_1%3F%255Fencoding%3DUTF8">Reverse Mortgages For
Dummies</a><img
src="http://www.assoc-amazon.com/e/ir?t=kirklindstrom&l=ur2&a
mp;amp;o=1" width="1" height="1"
border="0" alt="" style="border:none !important;
margin:0px !important;" /> By Sarah Glendon Lyons, John E.
Lucas
This book helps you: <UL> <LI>Decide if
a reverse mortgage is right for you <LI>Shop for the best
reverse mortgage products <LI>Find out if your home is
eligible <LI>Walk through each step of the process with
confidence <LI>Find a counselor who can help you </UL>
<a
href="http://www.amazon.com/exec/obidos/redirect?link_code=ur2&ta
g=kirklindstrom&camp=1789&creative=9325&path=http%3A%2F%2Fwww.a
mazon.com%2Fgp%2Fproduct%2F0471679569%2Fqid%3D1141569135%2Fsr%3D1-1%2Fref%3
Dsr_1_1%3Fs%3Dbooks%26v%3Dglance%26n%3D283155">The New Reverse
Mortgage Formula: How to Convert Home Equity into Tax-Free Income
</a><img
src="http://www.assoc-amazon.com/e/ir?t=kirklindstrom&l=ur2&a
mp;amp;o=1" width="1" height="1"
border="0" alt="" style="border:none !important;
margin:0px !important;" /> by Tom Kelly
From the
Back Cover: This straightforward, simple guide helps seniors and their
loved ones understand every aspect of the reverse mortgage, including: <UL> <LI>Tax ramifications of reverse mortgages <LI>Fees and costs associated with reverse mortgages <LI>Great things you can do with your reverse mortgage payout <LI>Calculating a reverse mortgage based on the owner's age, and
the home's location and value <LI>How to structure your payout
as a lump sum, monthly payments, or credit <LI>How much you can
borrow and at what rate </UL> "Tom Kelly breaks down
a misunderstood, complex topic into a very readable, valuable work for
seniors and adult children. This book not only provides one of the key
tools to aging in place, but it also clearly and accurately explains the
next big financial vehicle in the United States." —Dr. Richard
Garrigan, author and Emeritus Professor of Finance, DePaul University
<B><a
href=http://suite101.com/profile.cfm/DavidChee>David C
Chee</a> Reverse Mortgage Specialist and Certified Public
Accountant</b>
Mar 8, 2006 9:00 PM
David Chee :
. Bill Bischoff wrote the following article in SmartMoney.com. He
presents a compelling argument to stay in your home and get a reverse
mortgage to access your equity rather than sell and buy down in house to
access your equity, particularly if you have a high value home.
A FANTASTIC GAIN in the value of your home is, of
course, a glorious thing. But there is a dark side: When it comes time to
sell, you could owe a bundle in taxes. Most homeowners are fully
aware that when selling a home married couples can completely shelter up
to $500,000 from any federal tax hit, while unmarried folks can exclude
gains of up to $250,000. This means that many home sales trigger no tax
hit whatsoever.
But in today's market — where the prices of
homes have skyrocketed — the profits on many home sales will exceed these
amounts. And that means you'll be stuck paying ugly capital gains taxes on
the excess. (To see how much you might have to pay, run your numbers
through our Home Sale Tax Estimator.)
Unfortunately, avoiding
this tax hit is no easy task. But older homeowners looking to do a little
estate planning do have a couple of options. That's because folks who are
age 62 and older are eligible for something called a "reverse
mortgage," which can actually be a handy tax-saver when used
strategically. (Click here for the basics on reverse mortgages.) Here's
what you need to know:
The Tax Advantages of Sitting Tight The best way to avoid a potential tax hit? Don't sell your house.
Holding onto your house until you or your spouse pass away creates a
powerful tax break for your home's heir — whether that is the surviving
spouse or someone else. In fact, it could greatly reduce or even eliminate
the federal income tax bill when the property is eventually sold.
That's because of an obscure Internal Revenue Code provision that
allows a step-up in basis (essentially your cost) for appreciated assets
owned by a person who has died. Specifically, the basis of most assets
subject to capital gains taxes, including personal residences, are stepped
up to fair market value (FMV) as of the date of the owner's death. So if
the value of an asset eligible for this favorable rule stays about the
same between the date of death and the date of sale by the deceased
owner's heirs, there will be little or nothing to report to the IRS.
Here's how this all plays out in the context of a great
May 10, 2006 6:10 PM
David Chee :
Just like Terry Savage, I did a reverse mortgage for my father. It has
made such a positive change in his life. I can't tell you how happy I am
to see how happy he is now that he has financial freedom.
Moving
Forward With Reverse Mortgages By Terry Savage TheStreet.com
Contributor 5/9/2006 7:25 AM EDT URL:
http://www.thestreet.com/markets/realestate/10284335.html
Homeowners are divided into two categories: those who carry the largest
mortgages possible, and those who work to pay the loans off as soon as
possible.
In addition to getting rid of a big financial
headache, there's now even more of a reward for being a part of the second
group.
Using a "reverse mortgage," the estimated 10
million seniors who have paid off their mortgages can now create a monthly
"pension" check that will last as long as they live in their
home.
Reverse mortgages allow older homeowners to convert part
of their home equity into tax-free income. These plans are catching on --
but slowly. That's because seniors who had the good sense to pay down their
mortgages are now hesitant to borrow against that home equity to supplement
their monthly income.
That's understandable -- but it's a
mistake. You should at least consider whether a reverse mortgage might be
appropriate for you -- or your parents or grandparents who are "house
rich" but income poor.
That's exactly what I did for my
own 84-year-old father a few months ago. I helped him take out a reverse
mortgage on his paid-up retirement condo. So you see, I'm putting my money
where my mouth is. Or to be more accurate, I helped my dad to put his own
money in his pocket, just as I'm advising you to consider.
Here's how reverse mortgages work, and where to get more information.
To get a reverse mortgage you (and your spouse or co-owner) must be
at least 62 years old. But it's best to wait to make the move until you're
at least in your 70s because the amount of money you can receive each month
-- or in a lump sum -- is determined by the value of your home, your age
and the current level of interest rates. The older you are, the more money
you'll receive.
If you'd like to figure out how much money you
can receive on a reverse mortgage, go to ReverseMortgage.org and use its
handy online calculator. This Web site, run by the National Reverse
Mortgage Lenders Association, also will allow you to search for a lender in
your area.
To qualify for a reverse mortgage, your original
mortgage must be
______________ <font size="-3">The contents of this
letter/report <b><i>does not necessarily reflect the opinions
or viewpoint of normxxx.</i></b> They are provided for
<b><i>informational/educational</i></b> purposes
only.</font>
<font size="-3">The
content of this message is <b><i>not</i></b> to be
construed as constituting market or investment advice. It is intended for
<b><i>educational</i></b> purposes only.
Individuals should consult with their own advisors for specific investment
advice. </font>
May 20, 2006 8:18 AM
David Chee :
Mr. Ken Harney wrote a terribly misleading article about reverse mortgages.
He leads the reader to believe that if they were to get a reverse mortgage
today, they would be subject to the same sort of problems as the 94 year
old widow, Ms. Stephens. The fact is (which he only slightly mentions in
the last paragraph) is that Mr. Harney is writing about dangers that DO NOT
exist in today’s reverse mortgage product. In fact it has not existed since
1989 when Congress and the U.S. Department of Housing and Urban Development
introduced its Home Equity Conversion Mortgage (HECM) in 1989.
The point that this sort of loan is no longer available and has not been
since 1989 is largely lost in the context of his article.
Some
facts that Mr. Harney failed to disclose are that all reverse mortgages
with equity share features have been withdrawn from the market for a number
of years now. Furthermore, the consumer protections provide consumers with
accurate upfront disclosures illustrating the total costs of their loan if
it is outstanding for various periods of time. He also failed to mention
that today's reverse mortgage products, most notably the federally insured
Home Equity Conversion Mortgage (HECM), is priced with a far lower interest
rate than the 18 year-old loan he referred to in his article, yields a
higher percentage of the home's value to the borrower and contain extensive
consumer safeguards, including limitations on fees and interest rates.
While it is a sad and unfortunate story, Mr's Harney's misleading
title and context of his article may confuse seniors today who could
benefit from a reverse mortgage.
David C. Chee Reverse
Mortgage Specialist and Certified Public Accountant Read the article
Reverse Mortgage Safeguards Protect Seniors Email me for more Info
May 20, 2006 11:22 AM
:
I certainly agree that now that competition and the government have become
interested in the RM market, these loans may actually be an excellent
vehicle for many seniors/retirees.
However, I think his other
message, that one entering into such a transaction <b><i>should
never do so without careful legal/financial advice, is still sound and to
be followed!</i></b>
Unfortunately, the U.S. does
not have courts of equity where such egregious contracts can be judged on
their merits in an equitable proceeding. (The entertainment of
equitable procedings in our common courts is generally for non-monetary
relief.)
In this case, a simple contract recission (with the
plaintiff liable for interest on monies to be repaid) would seem to be the
most <b><i>equitable</i></b> solution. It would
seem that the present value of the house should more than cover such an
outcome.
May 20, 2006 12:06 PM
David Chee :
Mr. Harney would have provided a good service to his readers if his
"other message" was to consult legal/financial advice before
entering into such a transaction, as you say. I supposed one could infer
that from his article, but he certainly does not state it.
Who's heart would not go out to the poor 94 year old widow?
My point is that the article was misleading and will cause confusion
about today's reverse mortgages. Even Danh9 on the Real Estate discussion
board where you first posted this article is now going to reconsider a
reverse mortgage for his parents.
While his article about a
$2B bank going after a 94 year old widow will get his reader's attention,
it is not balanced piece and it misinforms the public which will do more
harm than good.
Jun 4, 2006 1:38 PM
Tim Paul :
After reading the original Harney article, the NRMLA response, Mr. Harney's
counter response and now several letters to the editor (mostly from
brokers), my only question is "What's being done to help the 94-old
widow?"
Apparently, specific facts aren't in dispute. The
industry's main concern is that reverse mortgages are getting an unfair
public black-eye for something that happened many years ago and couldn't
happen today. That's good to know.
But what
<b>is</b> happening today is that a $2B bank (reverse mortgage
lender?) is treating this elderly widow rather harshly. I suspect some
prospective reverse mortgage borrowers are thinking to themselves that
while it's nice that this specific type of loan deal can't be done anymore,
the people making these loans are still pretty darn ruthless.
It
would've been nice if the industry's response included a little more
empathy, acknowldgement of past mistakes, and committment to try to help
out victims of these unfair loans from the past.
Jun 4, 2006 3:30 PM
:
<blockquote><font color="#000099"><i> It
would've been nice if the industry's response included a little more
empathy, acknowldgement of past mistakes, and committment to try to help
out victims of these unfair loans from the
past.</i></font></blockquote>
Actually, this
is a case where the (much maligned) heavy hand of government can work
miracles. <b><i>I bet the prospect of a few audits would make
that $2B corporation suddenly discover its need for 'community
outreach.'</i></b>
Jun 12, 2006 10:06 PM
David Chee :
I don't believe that $2B bank is a bank that offers reverse mortgage
products today. That's why they can get away with treating the widow so
badly. I think Financial Freedom, Wells Fargo Mortgage and Seattle
Mortgage are the only banks that offer the current HECM program. That
might be why that bank can take the bad press and not care as much. I
wouldn't think any of the three current reverse mortgage banks wowuld dare
allow any bad press to occur because of their obvious vested interest in
their public image.
Jul 21, 2006 11:07 PM
David Chee :
Another Big Month in June The U.S. Department of Housing and Urban
Development endorsed 7,572 reverse mortgages in June and 55,659 thru the
nine months of fiscal year 2006. FHA endorsed 43,131 loans for all of
FY2005. Year-to-date totals represent a 83 percent increase over the 30,404
loans endorsed during the same period last year.
Nov 14, 2006 12:49 PM
:
<b>Reverse Mortgage Pitfalls [¹]</b> <i><b>Click here for link to complete article:</b>
http://www.smartmoney.com/ask/index.cfm?story=december2006&afl=myyahoo
</i>
By <i>Stephanie AuWerter, SmartMoney | 14
November 2006</i>
<b>QUESTION:</B> <i>My
parents are in their mid-70s and have some health issues. They would like
to stay in their home. Would a reverse mortgage make sense for them? <b>- Keven Engel, Scottsdale, Ariz. </B></I>
<b>ANSWER:</B> For cash-strapped seniors rich in home equity,
a reverse mortgage can spell the difference between burgers at Denny's and
steak at a four-star restaurant- <b><i>but that steak does come
at a high cost.</i></b> Reverse mortgages are the inverse of
traditional mortgages. Here, you borrow against your home's equity. But
instead of making payments to the bank, the bank makes payments to you.
<b><i>Unlike a regular mortgage, your debt (rather than equity)
grows over time.</i></b> But as long as you continue to live in
the home, you won't owe a dime. The loan is paid back when the house is
sold (often upon death) or your heirs can pick up the tab. <b>Only
folks age 62 and older are eligible.</B>
The most widely
used loan is insured by the Federal Housing Administration. In 2006,
maximum amounts for FHA loans ranged from $200,160 to $362,790, depending
on the home's value, interest rates, and the age of the youngest borrower
(if the home is owned by a couple). <b><i>Reverse mortgages
don't come cheap, though;</i></b> <b>you'll accrue
interest on the loan plus closing and service fees, as well as continuing
insurance costs.</B>
<b><i>A handy calculator
is available at http://www.reversemortgage.org.</i></b>
Tapping home equity <i>"should be the last line of
defense,"</I> says financial planner Jon Beyrer of Solana Beach,
Calif. Once done, less is available to heirs- or to the homeowners
themselves should they need it more desperately further down the line.
<b>QUESTION:</B> <i>I've used dollar-cost
averaging to purchase my employer's stock for 25 years. Now I have too much
exposure and want to sell half my shares. Should I dollar-cost-average when
selling? <b>- Michael Zierdt, Indianapolis</B>
</I>
<b>ANSWER:</B> Don't let greed or
optimism keep you from locking in investment gains and balancing your
portfolio. <i>"If you like the price, just do
it,"</I> advises financial planner Scott Kahan of New York City.
<b><i>But how you do it will require a little strategizing in
order to minimize the t
Feb 5, 2007 9:08 PM
David Chee :
FEBRUARY 5, 2007
PERSONAL FINANCE
Pumping Up Your
Reverse Mortgage New 'jumbos' are giving retirees the cash they need
to stay in their houses
From the living room of her
Huntington Beach home, Jean Ingram enjoys sweeping views of pristine
California wetlands and, off in the distance, Catalina Island. She and her
late husband paid $135,000 for the 2,200-square-foot Tudor-style home in
1978, and it's now valued at about $1.2 million. Yet until late last year,
the 69-year-old widow, awash in home equity but light on monthly income,
feared she would have to sell.
Ingram was able to hold on to the
house by taking out a jumbo reverse mortgage on the
property--"jumbo" because the amount was $388,000, and
conventional reverse mortgages would not offer as much on a $1.2 million
home. Either way, these financial deals allow homeowners 62 and older to
take the equity out of their houses without having to make monthly payments
to the bank. The balance comes due when the homeowner moves out or dies.
Then, the mortgage holder or the heirs have to sell the property or use
other funds to pay off the loan if they want to keep it.
Financial Freedom Senior Funding, based in Irvine, Calif., has been the
main source of the supersize loans since 2000
(financialfreedom.com/reversemortgagecalculator). But more providers are
entering the field, offering variations on the loans and increasing
competition, says Peter Bell, president of the National Reverse Mortgage
Lenders Assn., a trade group (reversemortgage.org). BNY Mortgage, based in
Newburgh, N.Y., plans to offer the first fixed-rate jumbo reverse mortgage
in February. It will be available initially in 10 Eastern U.S. states and
later in other states through collaborating lenders.
Ingram's
mortgage, like most of its ilk, is variable, with the interest rate tied to
the widely quoted London Interbank Offered Rate. Her rate is currently
8.42% and can readjust every six months, up to a maximum of 14.92%. The
8.42% rate is about two points higher than the interest on a regular
adjustable-rate mortgage. What significance is the interest rate if you're
not making monthly payments? It's the basis for calculating how much Ingram
or her heirs will eventually have to repay the lender.
Because
she chose to take all the money up front, rather than in a line of credit,
the mortgage company waived its regular fees and closing costs. With cash
from the reverse mortgage, Ingram paid off her original loan, upgraded
Feb 23, 2007 9:52 PM
David Chee :
The exciting news in the industry is that the HECM reverse mortgage is
offering a lower interest rate. The prior interest rate was the 1 year
Treasury bill plus one and a half percent. It has been reduced to one
percent over the one year Treasury bill. That is 6.07% today. This lower
rate will provide more money for those considering a reverse mortgage and
save thousands of dollars of interest as the loan ages.
I
believe the reverse mortgage industry will only continue to improve as they
gain in popularity and reverse mortgage lenders compete for the customers.
That is very good news.
